The policy announcement made is a well sequenced and calibrated move on the part of the regulator to exit in a phased manner from the existing accommodative monetary stance. The status quo on the key policy rates and the CRR are in line with expectations; especially due to sluggish pace of economic activity and low credit demand. The challenge before the regulator this time was Early Exit vs Delayed Exit. The challenge was particularly due to a stubbornly elevated CPI inflation, slow pace of domestic consumption and investment, constraints on the supply side and twin deficitsboth on fiscal and current account. While a premature exit would derail the fragile growth, a delayed exit would potentially endanger inflation expectations.
Increase in the SLR from 24 to 25% and closure of the special liquidity support measures under the refinance window are a step in that direction. Increase in SLR requirement will not impact the liquidity position as SCBS are currently maintaining SLR investments at around 27.6% of NDTL.
Macro economic scene:
RBI has kept the GDP projection for 2009-10 unaltered at 6% with an upward bias from that made in the first quarter review of July, 2009. WPI inflation for end March-2010 has been projected at around 6.5% with an upside bias. Bank credit growth fell to a 12-year low of 10.8% as on October 9, from 29.5% in the same period last year. The credit demand is expected to pick up in view of improvement in investment climate, overall corporate performance, and order book position etc. besides, there is also a huge government appetite.
The writer is chairman & managing director, Union Bank of India